3.2 Political and economic decision making

Question 1

International political & economic organisations

Answer 1

World Trade Organisation (WTO)
International Monetary Fund (IMF)
World Bank

Question 2

Foreign Direct Investment

Answer 2

A financial injection made by a TNC into a nation’s economy, either to build new facilities (factories/shops) or to acquire, or merge with, an existing firm already based there.
Contributing towards globalisation.

Question 3

BRICs group

Answer 3

Brazil, Russia, India, China
The 4 large fast-growing emerging economies.
2014 - BRICs nations announced the establishment of New Development Bank.

Question 4

Impact of politics on globalisation

Answer 4

National gov may create political barriers that stop global flows.

Question 5

Why may global flows be viewed as threats

Answer 5

Imports of raw materials & commodities can threaten a nation’s own industries
Migrants can bring cultural change & religious diversity: some don’t welcome this
Info can provide citizens w/ knowledge that their gov finds threatening

Question 6

When were the Bretton Woods institutions established

Answer 6

after WW2

Question 7

World trade over history

Answer 7

The amount of world trade increased fairly slowly from the 1970s to the mid 1990s.
There was a huge growth in export trade after 2002
A sharp dip in 2008-2009 due to the global recession / global financial crisis
It returned to ‘normal’ levels in 2011, but growth has been slow ever since.
In 2014, there is about US $19 trillion world trade in goods, compared with less than $1 trillion in the early 1970s.

Question 8

Consequences of Great Depression in 1930s

Answer 8

global economic downturn -> free trade replaced by protectionism (nations blocking foreign imports w/ tariffs, damaging export markets for other countries etc.)

Question 9

Will the Bretton Woods players maintain their influence in the future?

Answer 9

2008 financial crisis originated in US & EU & undermined world economy. Govs in developing countries have become more skeptical of financial advice that the IMF and World Bank offer.

WTO lack of success in getting 159 member states to reach global agreement on any aspect of trade esp in relation to food raises qs about its long-term role.

Geopolitical changes means that new alternatives are emerging to the BW institutions. Developing countries in search of assistance can approach the China Development Bank (CDB).

Question 10

Different types of FDI

Answer 10

Offshoring
TNCs building prod facilities in offshore low-wage economies.

Foreign mergers
2 firms in diff countries join forces to create a single entity.

Foreign acquisitions
TNC launches a takeover of a company in another country

Transfer pricing
Channeling profits through a subsidiary company in a low-tax country e.g. Ireland. The Organisation for Economic Cooperation and Development (OECD) is now attempting to limit this practice.

Question 11

Impact of protectionism vs free trade on total trade volume

Answer 11

Protectionism reduces total trade volume, whereas free trade (no taxes, tariffs, or quotas) increases it.

Question 12

Ways countries implement protectionism

Answer 12

Taxes, tariffs, quotas.
Banning foreign firms from operating in services like banking, retail and insurance.
Restricting, or banning, foreign companies from investing in their country.

Question 13

IMF’s role in globalisation & evaluation

Answer 13

Washington DC
Aims to maintain a stable international financial system, and this promotes free trade and globalisation.
Channels loans from rich nations to countries that apply for help.
Recipients must agree to run free market economies that are open to outside investment.
TNCs can enter these countries more easily.
The USA exerts significant influence over IMF policy despite the fact that is has always had a European president.

IMF has been criticised for promoting a ‘western’ model of economic development that works in the interests of developed countries and their TNCs.
IMF rules & regulations can be controversial esp w/ strict financial conditions imposed on borrowing govs who may be required to cut back on health care, education, sanitation & housing programmes.

Provides loans to countries facing short-term balance of payment difficulties
2008 Greece received the first in a series of IMF loans when its foreign currency earnings were insufficient to pay its existing debt obligations.

Question 14

World Bank’s role in globalisation & evaluation

Answer 14

Washington DC
World Bank lends money on a global scale.
Gives direct grants to developing countries.
Has helped developing countries develop deeper ties to the global economy but has been criticised for having policies that put economic development before social development.

World Bank imposes strict conditions on its loans & grants. World Bank requires recipients to adopt trade liberalisation policies and to open up to FDI by removing legal restrictions and capital controls.
It also requires them to adopt structural adjustment programmes to reduce government budget deficits.
Developing countries may therefore prefer to borrow from China, or the Chinese-led Asian Infrastructure Investment Bank, which doesn’t impose such conditions.
Controversially, all World Bank presidents have been American citizens.

In 2014 it gave a US $470 million loan to the Philippines for a poverty reduction programme and a $70 million grant to the Democratic Republic of Congo for the Inga 3 mega-dam HEP project

Question 15

WTO’s role in globalisation & evaluation

Answer 15

Geneva, Switzerland
1995 Took over GATT (General Trade Agreement on Trade & Tariffs.
Deals with flow of goods & services
An international organisation that works to reduce trade barriers (both tariff and non-tariff) and create free trade.
WTO advocates trade liberalisation esp for manufactured goods & asks countries to abandon protectionism attitudes in favour of untaxed trade.
WTO’s ‘most favoured nation’ requires a country to treat all WTO members to the same low barriers as the most favoured.

Question 16

Tariff

Answer 16

Tax on goods entering or leaving a country

Question 17

Non-tariff trade barriers

Answer 17

Quotas
Quantitative limit on imports or exports
Subsidies to domestic producers.

Question 18

Austerity programmes

Answer 18

Policies to reduce gov deficit

Question 19

Balance of Payments

Answer 19

Records inflows of money into the country as payments of exports or as FDI, and outflows like payments for imports or FDI by domestic firms.

Question 20

National government policies that allow TNCs to grow in size & influence using the strategies

Answer 20

Free-market liberalisation/neoliberalism
Privatisation
Encouraging business start-ups

Question 21

Free-market liberalisation

Answer 21

aka Neoliberalism
Associated w/ policies of US President Ronald Reagan & Margaret Thatcher’s UK government during the 1980s.
Government intervention impedes economic development.
As wealth increases, trickle-down will take place from the richest members of society to the poorest.
Restrictions being lifted on the way companies and banks operated.
Deregulation of the City of London in 1986 removed large amounts of red tape.

Question 22

Trickle-down

Answer 22

positive impacts on peripheral regions (and poorer people) caused by the creation of wealth in core regions (and among richer people)

Question 23

Sovereign wealth funds

Answer 23

Gov-owned investment funds & banks, typically associated w/ China & countries that have large revenues from oil e.g. Qatar

Question 24

Privatisation

Answer 24

UK gov allowing foreign investors to gain a stake in privatised national services & information.
Until 1980s railways & energy supplies owned by state.
Running services was costly so sold to private investors to reduce gov spending & raise money.
Permitting foreign ownership allows an injection of foreign capital through FDI, introduces new technologies and promotes globalisation.

Question 25

Encouraging business start-ups

Answer 25

Grants and loans are often made to new businesses especially in areas that are seen to be globally important growth areas such as ICT development, pharmaceuticals or renewable energy.
There could also be low business taxes, well-enforced contract laws, minimum regulation and efficiency bankruptcy procedures, which encourage new firm creation.
It creates innovation and competition in new production techniques, erodes excess profit of monopolies, lowers prices and increases household PP.
Where legal restrictions on foreign ownership and capital controls are also removed, foreign new businesses will be attracted to start up, promoting globalisation.
e.g. The UK Government’s support for ICT start-ups in Tech City (Silicon Roundabout) in the Old Street area of London.
Methods range from low business taxes to changes in the law allowing both local and foreign-owned businesses to make more profit.

Question 26

How can national governments accelerate globalisation

Answer 26

1) By Joining/Promoting Free Trade Blocs
2) Free market liberalisation
3) Privatisation
4) Encouraging Business Start-Ups

Question 27

Trade Blocs

Answer 27

Voluntary international organisations that exist for trading purposes, bringing greater economic strength and security to the nations that join

Question 28

NAFTA trade bloc

Answer 28

Canada, USA, Mexico

Question 29

Problems with trade blocs

Answer 29

Trade distortion
Imposition of common external tariff makes goods from non-members expensive. Trade distorted as the switch from cheaper non-member producer to more expensive member producer. Prices rise and SOL falls.
Short term unemployment
Specialisation shifts resources to industries which have a comparative advantage.
Firms being specialised away from will shut down. Workers’ employment lost (though there are new jobs in the expanding specialised industry and in new demand areas from increases purchasing power)
new jobs likely to benefit new workers and older ones less likely to retrain
Cultural erosion
cheap uniform products across the bloc replace more expensive local variants.
Sovereignty loss
nation gives up determination of some areas of economic (and in single market, immigration) policy

Question 30

Special Economic Zone

Answer 30

An industrial area, often near a coastline, where favourable conditions are created to attract foreign TNCs.
These conditions include low tax rates & exemption from tariffs and export duties.

Question 31

Attitudes to FDI

Answer 31

Attitudes to FDI have changed in developing and emerging countries.
During the period of decolonisation in the 1950s, 1960s and 1970s, many newly independent countries rejected international trade as exploitative.
They preferred self-sufficiency through import substitution.
However, four Asian countries (Singapore, Taiwan, South Korea, Hong Kong) chose export led growth.
They experienced much faster economic growth than countries following import substitution, and became known as ‘Asian Tiger economies’.
By the 1980s, most countries had changed their attitudes towards FDI and globalisation.
They no longer viewed FDI as exploitative (paying low prices for resources, low wages to workers, demanding low taxes and polluting the environment.)
Instead they viewed FDI as positive - creating new jobs, better paying than the existing alternative (e.g. subsistence farming) with reliable wages and better working conditions, which introduced new technology and were reliable tax contributors.
As a result, FDI by developed country TNCs expanded to new areas, initially to the Asian Tigers, then to other Asian and South American countries, and since 2000 also African countries.